NetApp, Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months of fiscal 2021, ended October 30, 2020. Comparative periods ended October 25, 2019. NetApp provides data management software, systems and services for on-premises and cloud environments. Amounts below are in millions of dollars except per-share data.
Financial results
| Metric | Q2 FY2021 | Q2 FY2020 | Six months FY2021 | Six months FY2020 |
|---|---|---|---|---|
| Revenue | $1,416 | $1,371 | $2,719 | $2,607 |
| Gross profit / margin | $933 / 66% | $925 / 67% | $1,805 / 66% | $1,741 / 67% |
| Operating income / margin | $182 / 13% | $296 / 22% | $318 / 12% | $400 / 15% |
| Net income | $137 | $243 | $214 | $346 |
| Diluted EPS | $0.61 | $1.03 | $0.96 | $1.44 |
| Operating cash flow | $161 | $(53) | $401 | $257 |
- Revenue mix: Q2 product revenue fell 3% to $749; software maintenance rose 19% to $303; hardware maintenance and other services rose 5% to $364. For the first half, product revenue fell 3% to $1,376, while software maintenance rose 20% to $604 and hardware maintenance and other services rose 7% to $739.
- Margins and expenses: Gross margin declined one percentage point in both comparisons. Management attributed weaker product margins to lower average selling prices and higher materials costs, including costs associated with a higher mix of all-flash systems. Q2 operating expenses rose to $751 from $629, including $37 of restructuring charges.
- Cash and liquidity: At October 30, cash and cash equivalents were $3,529 and short-term investments were $117, versus $2,658 and $224 at April 24. Working capital was $1.9 billion, up $1.2 billion from April 24. First-half capital expenditures were $92.
- Debt: Long-term debt was $2,631 on the balance sheet; principal debt was $2,650, versus $1,673 at April 24. NetApp issued $2.0 billion of notes in June and used $513 to redeem its 2021 notes. No commercial paper was outstanding at quarter-end; the $1.0 billion revolving credit facility was undrawn.
- Cash uses and deferred revenue: First-half dividends paid were $214. Deferred revenue and financed unearned services revenue totaled $3,651, down from $3,698 at April 24; the company expects to recognize about 50% within 12 months.
Material changes and unusual items
- Revenue grew 3% in Q2 and 4% in the first half, primarily from recurring maintenance and services; product revenue declined. First-half maintenance growth benefited from an extra fiscal week, contributing approximately $20 to each of software and hardware maintenance revenue.
- Net income and operating margin fell materially year over year, reflecting increased operating expenses and lower product margins. The prior-year comparisons included a $38 gain on the sale of Sunnyvale property, which did not recur.
- Spot, a cloud compute-cost optimization company, was acquired for $340 cash in July; Cloud Jumper was acquired for approximately $34 in April. First-half acquisitions used $350 net of cash acquired. Spot added $249 of goodwill; the acquisition accounting was preliminary.
- The company recorded a $14 loss on extinguishment of debt in the first half. Q2 also included a $5 litigation settlement charge in general and administrative expense.
Outlook, risks and contingencies
- COVID-19: Management said customer purchase delays and logistical and minor supply-chain constraints continued; some demand related to remote work and digital business provided an offset, but the net effect on product revenue was unfavorable. The extent and duration of business impacts remain uncertain.
- Outlook: The filing provides no numerical revenue or earnings forecast for the current quarter or full fiscal year. It says prior fiscal 2021 guidance was limited to the first nine months. NetApp expects $50–$100 of capital expenditures for the rest of fiscal 2021 and planned to restart share repurchases in Q3 after suspending them during the first half. Management said liquidity should meet requirements for at least 12 months.
- Restructuring: The August 2020 plan reduced the global workforce by approximately 5%, with substantially all activities expected to finish by the end of Q3 FY2021.
- Legal and tax matters: NetApp is defending a securities class action concerning fiscal 2020 guidance and is involved in patent litigation. It recorded no material accrual for these matters and cautioned that unfavorable outcomes could be material. Gross unrecognized tax benefits were $224, of which $138 was recorded in long-term liabilities; tax audit outcomes and timing remain uncertain.
- Other exposures: The filing highlights technology and cloud-transition competition, reliance on channel partners and suppliers, customer and distributor concentration, cybersecurity and privacy risks, foreign exchange exposure, and debt and market risks. Arrow Electronics and Tech Data represented 25% and 20% of Q2 revenue, respectively.
Investor verification priorities
- Assess whether recurring maintenance growth can offset continued weakness in product revenue and whether the first-half comparisons are affected by the extra fiscal week.
- Track product pricing, component costs, product mix and gross-margin recovery, alongside operating expenses and the effects of restructuring.
- Review acquisition integration and returns from Spot and Cloud Jumper, including the preliminary purchase accounting and goodwill.
- Monitor cash generation, debt service, planned share-repurchase resumption, and the remaining $477 of repurchase authorization.
- Follow COVID-19 demand and supply-chain effects, distributor concentration, tax audits, and developments in the securities and patent litigation.